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The Financial Reporting of Inventories (Portfolio 5168)

BNA Tax and Accounting Portfolio 5168-2nd, Benke and Vitray, The Financial Reporting of Inventories (Accounting Policy and Practice Series), reviews the most common methods of reporting inventories, the financial statement implications of changing inventory methods, and the rules for disclosing inventory methods and practices in financial statements.

DESCRIPTION

BNA Tax and Accounting Portfolio 5168-2nd, Benke and Vitray, The Financial Reporting of Inventories (Accounting Policy and Practice Series), reviews the most common methods of reporting inventories, the financial statement implications of changing inventory methods, and the rules for disclosing inventory methods and practices in financial statements. The selection of an inventory method will have a significant effect on the financial reporting of a company. Because it is rarely possible for a company to accurately trace individual items purchased for inventory then sold to customers, the company must make an assumption about the flow of goods into the company. Then, when it sells the goods, it must make an assumption about the allocation of inventory costs between cost of goods sold and ending inventory. The most common cost flow assumptions are first-in, first-out (FIFO), last-in, last-out (LIFO), and average cost. Profitability and measures of profitability will rise or fall, depending on the inventory method selected. In inflationary times, FIFO will report a lower Cost of Goods Sold than either LIFO or average cost. Similarly, in inflationary times, LIFO will report a higher Cost of Goods Sold than either FIFO or average cost, and average cost will report a Cost of Goods Sold between FIFO and LIFO. This Portfolio explains the rules and common practices used in selecting and implementing these methods. The financial reporting of inventories is an enriching subject. On the surface, inventory accounting seems easy to understand and execute. Further understood, the financial reporting of inventories seems unnecessarily and sometimes confusingly complicated. Even further understood, the financial reporting of inventories becomes a perplexing subject with no final answer on how inventory should be accounted for, how it should be measured to determine if it is being efficiently managed (inventory turnover, etc.), or how the accounting policies and practices surrounding it should be disclosed in financial statements. This Portfolio not only explains the existing accounting rules regarding inventory but also identifies areas in which rules do not exist and industry practice is used. This Portfolio may be cited as BNA Tax and Accounting Portfolio 5168-2nd, Benke and Vitray, The Financial Reporting of Inventories (Accounting Policy and Practice Series). Within the Accounting Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.

AUTHORS

DR. RALPH L. BENKE, JR., PH.D., CMA

Dr. Ralph L. Benke, Jr., CMA, Ph.D., Florida State University; M.B.A., University of Washington; B.S., Washington State University; Arthur Andersen/Journal of Accounting Education Professor (1988–1997); Professor Emeritus (1997–Present); Director, School of Accounting (1984–1986, 1994); Director, Center for Professional Development (1991–1993); Director, Accounting Information Systems Concentration (1988–1993). Dr. Benke has won numerous teaching awards. His teaching experiences include the University of Idaho (1972–1974); Florida State University (1974–1977); the University of Georgia (1977–1981); and James Madison University (1982–1997). He has served as Founder and Editor of the Journal of Accounting Education (1982–1987) and as Founder and Director of the Center for Research of Accounting Education (1981–1984, 1986–1993). Dr. Benke has numerous publications and has contributed articles to numerous accounting and financial periodicals.

RANDALL J. VITRAY, CPA

Randall J. Vitray, CPA, B.A., Economics, Hanover College. With over 35 years of public accounting experience, Mr. Vitray was an Accounting Consulting Services Partner in the National Risk and Quality group of PricewaterhouseCoopers LLP. As part of the PwC National office, Mr. Vitray was responsible for developing guidance on emerging accounting issues. Mr. Vitray has authored articles for the Journal of Accountancy and various other publications, and has testified at public hearings conducted by the FASB. Moreover, Mr. Vitray has served on working groups of the EITF on derivative transactions and leasing issues. Of note, Mr. Vitray also served as an advisor to the FASB on its special purpose entity consolidations project, which led to FIN 46. Mr. Vitray is a member of both the AICPA and the Pennsylvania Institute of CPAs.

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